Office sector tops off 2000 rally, but will slow

March 01, 2001 |

By Daryl Delano, Cahners Business Information

The office building sector was the healthiest commercial construction market for the third consecutive year during 2000, rallying into the final quarter last year. Through the first 11 months of 2000, total spending for new office construction and renovation was running 14.3 percent ahead of the total for the same period the year before.

By the time the final Commerce Department numbers come in, expect about 13 percent more office construction work in 2000 than in 1999. And look for growth of about 7 percent for the year ahead-the smallest gain in the past six years, but a trend still solidly positive.

The office market has benefited from continued expansion in professional, technical and sales jobs. The third-quarter 2000 national office-vacancy rate stood at less than 9 percent, a sure sign that in many markets supply still hadn't caught up with overall demand.

Dot-com dampening?

Yet, it's inevitable that closures and layoffs at dot-com firms will dampen demand for new office space in many markets this year. Expect office spending growth to continue-albeit at a much slower rate-during 2001, but the national vacancy rate to rise to somewhere between 10 percent and 12 percent. There's still no indication, however, that we're headed for the "bust" conditions of the early 1990s. Consider these figures just released by commercial brokerage and research firm CB Richard Ellis:

Over the last year, the combined national office vacancy rate for downtown and suburban buildings slid from 9.5 percent during third-quarter 1999 to 7.7 percent in third-quarter 2000.

During the July through September period of last year, the vacancy rate for downtown office space was only 6.2 percent-2.5 percentage points lower than during the third quarter of 1999.

Suburban vacancy rates moved lower as well-while remaining well above the downtown level-with last year's third-quarter rate at 1.5 percentage points lower than during third-quarter 1999, to a healthy 8.6 percent.

"Dot-com fever" hadn't quite broken when the third quarter ended, so office vacancy rates in e-commerce-centric areas such as San Jose, San Francisco and Boston were all still below 2 percent. The nation's highest rates were in Dallas-Fort Worth and Jacksonville. Also faring poorly were Denver; Albuquerque, N.M.; and St. Louis, where vacancy rates rose by 2 percent between June and September.